The British pound edged lower on Thursday after reaching its highest level in over four months, as investors awaited the Bank of England’s (BoE) interest rate decision later in the day.

Market participants were also monitoring UK employment and wage data, as well as developments in U.S. tariffs and broader geopolitical factors.

Sterling slipped 0.2% against the U.S. dollar to $1.2975, after briefly touching $1.3015, its strongest level since early November. The pound, along with the euro, has seen a notable rise against the dollar since January, driven by concerns over the potential negative impact of President Donald Trump’s shifting tariff policies on the U.S. economy.

Additionally, expectations of increased European defense spending and persistent inflation have bolstered both sterling and the euro against the dollar.

As of Thursday, the euro remained steady at 83.79 pence against the pound. The common currency has gained about 1.7% in March versus sterling, reflecting market optimism that higher spending in Germany and the eurozone on defense and infrastructure will spur economic growth.

Bank of England expected to hold rates

Economists anticipate the Bank of England will keep its benchmark interest rate at 4.5% when it announces its decision at 12:00 GMT. The central bank is expected to maintain its cautious approach amid Trump’s tariff policies and an imminent tax increase for UK employers. Since last August, the BoE has gradually lowered rates from a peak of 5.25%.

Fresh data on Thursday indicated that UK wage growth remained stable, with further signs of resilience in the labor market during January and February.

“The labor market data will likely reinforce the MPC’s cautious stance,” said Matt Swannell, chief economic advisor at EY Item Club, referring to the BoE’s Monetary Policy Committee (MPC).

“At the current pace, gradual interest rate cuts are likely to continue until at least summer, by which point the MPC will have more clarity on the longer-term economic outlook,” Swannell added.

Dollar slightly higher, but near five-month lows

The U.S. dollar saw a slight uptick on Thursday but continued to trade near five-month lows, with the dollar index at 103.69, down 3.6% for the month. This follows the Federal Reserve’s decision on Wednesday to hold interest rates steady while also lowering U.S. growth forecasts.

Geopolitical focus: Ukraine war talks

Investors also kept a close watch on geopolitical developments, particularly regarding the Ukraine war. On Wednesday, Trump and Ukrainian President Volodymyr Zelenskiy agreed that technical teams from both sides would convene in Saudi Arabia in the coming days to discuss potential peace negotiations.